* China records first quarterly foreign direct investment
deficit
* Execs worry about China slowdown, geopolitics, regulations
* Trend could weigh on yuan, chip away at growth
potential-analyst
* China-focused buyout fundraising has ground to a halt-data
BEIJING/HONG KONG, Nov 28 (Reuters) – U.S. furniture
company head Jordan England thinks his firm’s Chinese suppliers
are among the best in the game, but geopolitics and a slowing
economy have pushed him to source more products from Southeast
Asia, Eastern Europe and Mexico.
“I’m looking to move away from it (China),” said England,
CEO and co-founder of Florida-based Industry West.
“It was always ‘China plus one,'” he said, referring to the
diversification strategy many businesses began implementing
after Washington imposed trade tariffs on Beijing in 2018 to
ensure they were not wholly dependent on Chinese suppliers.
Now “it’s like ‘plus-10’ and then China,” he added, with the
latter down to providing half of Industry West’s products and
being trimmed more.
Foreign investors have been sour on China for most of this
year, but data released over the past month has provided clear
evidence of the negative impact de-risking strategies are having
on the world’s second-largest economy.
Activity surveys showed manufacturing unexpectedly
contracted in October, while exports accelerated their decline.
China recorded its first-ever quarterly deficit in foreign
direct investment in July-September, suggesting capital outflow
pressure.
Nicholas Lardy, senior researcher at the Peterson Institute
for International Economics, said in a note the new data imply
that foreign firms are not only declining to reinvest earnings,
but are selling existing investments and repatriating funds.
This trend could further weaken the yuan and clip China’s
economic growth potential, he added.
“In recent years, the scale, proportion and growth rate of
foreign investment absorbed by China have all remained at a
relatively high level,” He Yadong, a Chinese commerce ministry
spokesperson, said in response to a question from Reuters.
LONG-TERM PROSPECTS
Businesses have longstanding worries about geopolitics,
tightening regulations and a more favourable playing field for
state-owned companies. But for the first time in the four
decades since China opened up to foreign investments, executives
are now also concerned about long-term growth prospects.
A survey released last week by The Conference Board, a think
tank, showed more than two-thirds of the CEOs who responded said
China’s demand has not returned to pre-COVID levels, with 40%
expecting a decrease in capital investments in the country over
the next six months and a similar proportion expecting to cut
jobs.
China is outwardly confident about growth despite a global
economic slowdown, with policy advisers favouring a target of
about a 5% expansion of gross domestic product in 2024 and the
country aiming to double the economy’s size by 2035.
But England said he is concerned about how his Chinese
suppliers that also produce for the domestic market will cope
with the country’s severe property market downturn.
“I’m worried about these factories going from 500 workers to
200, to 100,” he said.
OPEN FOR BUSINESS?
Premier Li Qiang’s overtures declaring China open for
business to foreign investors after the pandemic have been
greeted with scepticism in some Western boardrooms in light of a
broader anti-espionage law, raids on consultancies and due
diligence firms and exit bans, trade bodies say.
Li is expected to make a similar call on Tuesday at the
country’s inaugural China International Supply Chain Expo, which
it is expected to use to tout its supply chain advantages.
“Foreign business executives here are eager to continue in
China,” AmCham President Michael Hart said. “But boards back in
the U.S. are wary.”
European firms have raised fair competition concerns about
state-directed lending to Chinese manufacturers, while Noah
Fraser, managing director of the Canada China Business Council,
said “bad blood” remains over the detention of two Canadians
from 2018 to 2021.
In private equity, while Asia-focused funds have allocated
capital to China, data from Preqin shows that as of Nov. 24, no
China-focused buyout fund had been raised in 2023 in any
currency, compared with $210 million in 2022 and $13.2 billion
in 2019, before the pandemic.
Primavera Capital founder Fred Hu cites mounting
macroeconomic uncertainty, a “murky capital market outlook,” and
lingering concerns over past regulatory crackdowns on
high-growth industries such as technology and education.
“Tech firms and other private enterprises must be able to
tap public markets for financing and liquidity, so the current
market conditions in China do considerable harm to the real
economy,” said Hu, adding China-focused private equity firms
were diverting capital to Southeast Asia, Australia and Europe.
Despite the challenges, foreign investment flows are not
unidirectional. Many firms, especially in the retail sector,
still target China’s giant market. McDonald’s said last
week it had struck a deal to boost its stake in its China
business.
An executive at a European hotel chain, who spoke on
condition of anonymity due to the topic’s sensitivity, said his
firm was happy to reinvest profits in China for now.
“We know what’s going on politically and yes, economically,”
he said, adding the latest data “was nothing to be proud of.”
“It’s slow, but only warrants taking a ‘wait and see
approach.'”
(Reporting by Joe Cash and Ellen Zhang in Beijing and Kane Wu
in Hong Kong; Additional reporting by Eduardo Baptista and Don
Durfee in Beijing; Graphics by Kripa Jayaram; Writing by Marius
Zaharia; Editing by Jamie Freed)
